With prices on the rise and our tax structure not adjusted for inflation, the middle-class and lower middle-class segments deserve a sizable tax relief in the forthcoming Budget. Also, industry is justified in demanding a reduction in corporate tax rates as this is needed to remain competitive in a globalised world, says T. C. A. RAMANUJAM.
With prices on the rise and our tax structure not adjusted for inflation, the middle-class and lower middle-class segments deserve a sizable tax relief in the forthcoming Budget. Also, industry is justified in demanding a reduction in corporate tax rates as this is needed to remain competitive in a globalised world, says
There are great expectations about the forthcoming Budget, to be presented on February 29. Direct tax collections are at an all-time high, and the target of Rs 3,00,000 crore is likely to be breached.
For the first time, the direct tax collections will represent 50 per cent of total tax collections. That is something to be proud of. The Finance Minister, Mr P. Chidambaram, and the tax administration deserve all the encomiums being showered on them . But the middle-class and the lower middle-class segments are expecting sizable tax relief this time around.
Basic Exemption and Marginal tax rates
Our tax structure is not adjusted for inflation. The cost inflation index is applied only for purposes of levying capital gains tax. Year after year, prices continue to rise. The tax slabs at the maximum marginal rate of tax require revision. The income-tax exemption limit for individuals is Rs 1.10 lakh.
The maximum marginal rate of 31.5 per cent is applied on incomes above Rs 2.5 lakh. Even after adjusting for purchasing power parity and exchange rates, it can be safely said that individuals earning similar income in other emerging economies are not taxed at this high rate. A recent research paper has indicated the rates applied in various developing countries for individuals earning Rs 4 lakh a year after adjusting for PPP and exchange rates.
Thailand applies rates of 5 per cent, 10 per cent and 20 per cent on incomes far higher than Indias basic exemption limit. The World Bank itself had revised downwards its estimate of Indias GDP in PPP terms. Our GDP is now estimated at $2.34 trillion compared to $3.8 trillion computed earlier. India has now moved down to the 5th spot among the large economies of the world, after the US, China, Japan and Germany. The per capita GDP on PPP terms in India is now calculated at $2,126. The global average is $8,972.
We seem to be taking a rank among such African countries as Angola, Sudan, Namibia, and Swaziland. Even Pakistan has a higher per capita GDP of $2,396 as per the figures for the year 2005. Chinas per capita GDP stood at $4,091.
We have to realise that despite the boast of a GDP growth rate of 9 per cent, India continues to be a poor economy. This necessitates an upward revision of the basic exemption limit to about Rs 1.5 lakh.
Corporate Tax Rates
There is a strong demand from industry for a reduction of corporate tax rates. The rate was brought down in 2005 from 35 per cent to 30 per cent. This is in keeping with the rates applied in neighbouring South-Asian countries. Foreign companies are taxed at 42.5 per cent including surcharge. The Indian tax rate of 30 per cent however is only the ostensible rate. Add the surcharge and cess and it goes up to 33.9 per cent.
The differential between the rates applied for domestic and foreign companies will almost disappear if we take into account the additional distribution tax on dividends at 16.5 per cent. One big irritant for India Inc. is the levy of FBT (fringe benefit tax). The FBT and the STT (securities transaction tax) came as surprise innovations. There is a strong case for pegging the corporate tax rates at 30 per cent, in whatever way the Government may choose to structure the same incorporating FBT, cess and surcharge.
Our tax rates have to remain competitive in a globalised world, which is witnessing cutthroat competition for attracting international capital. The OECD has unequivocally recommended the reduction of Indias corporate tax rates. It has also suggested synchronisation of tax treatment of depreciation with accounting treatment under the company law. Such a measure may even obviate the need for Minimum Alternate Tax (MAT). Even the US is moving in the direction of eliminating MAT.
The Finance Minister has expressed confidence that our tax-GDP ratio will exceed the targeted 11.8 per cent. It may be useful to remember that our ratio is one of the lowest in the world. In Europe it is 36.2 per cent. Sweden and Denmark reported 50 per cent of tax revenues on GDP.
The US pays about 30 per cent of its income in taxes. The least taxed nation among the OECD countries is Mexico with a tax-GDP ratio of 20.6 per cent. What should we do to improve the ratio? There is a constant grievance among the captains of industry that agriculture which accounts for 19 per cent of the GDP goes scot-free and does not pay any income tax. Services which accounted for 50 per cent of the GDP are now heavily taxed at 12.5 per cent. Government has started thinking of alternative ways for raising revenue.
Exit tax on IIT Professionals
Specialised institutions such as the IITs and the IIMs have caught the eye of the Government, which heavily subsidises fees paid by the students in these institutions. On graduation, most of them go abroad and work for transnational corporations. In 2003, the U. R. Rao Committee set up by the NDA Government came up with the suggestion that industry employing these students on graduation should pay a cess to help the Government recover the subsidy cost.
The UPA Government has not forgotten the report. The HRD Ministry has suggested the levy of an exit tax on graduates who leave the country from specialised institutions run on massive subsidies. A parliamentary panel has supported this idea. It has also recommended a graduate tax on companies engaging trained manpower.
The argument is that such levies will help fund the requirements for primary and secondary education. As in the case of FBT, the Finance Minister may take a leaf from Australia where students on graduation have to pay back the subsidy received on their education whenever they choose to work outside the national priority area.
Indias billionaire population has swelled. Constant encouragement to stock market activity has resulted in huge market capitalisation and accretion to wealth. High-net-worth individuals with assets exceeding $1 million now number more than one lakh.
Unfortunately, the number of wealth tax payers and the collections from wealth tax do not reflex the significant increase in wealth. This is because of the complete exemption of stocks and shares from the levy of wealth tax and the elimination of long-term capital gains tax on share transfers.
The Gift Tax Act was abolished with corresponding amendment to the income-tax law. A quasi-judicial tribunal recently ruled that the crores of rupees received by political heavyweights should be considered tax-exempt as they represent gifts from admirers and party-workers. There is a strong case for introduction of a donee-based gift tax law. There is a similar case for introduction of the estate duty in the light of the large number of high-net-worth individuals. There should be equity in taxation.
Budget secrecy should be given the go-by. There should be a debate about the introduction of new levies.
T. C. A. RAMANUJAM (The author is a former Commissioner of Income-Tax.)